Max India’s (Max) hospital business (MHC) revenue grew 6% to Rs 6.76 billion, while EBITDA declined 14 % y-o-y to Rs 690 million. Margins were impacted by regulatory controls, hiatus in cashless insurance, and increase in wages. Going forward, performance will normalise in H2FY18 led by a) restoration of cashless services, b) cost saving of Rs 600 million and c) expansion in Saket and Shalimar Bagh. The health insurance business (Max Bupa) gross premium written grew 22%, while first year premium grew only 8% due to price increases. We continue to see Max as a compelling bet on the tertiary care market in NCR, and on upsides from investments in health insurance. Maintain ‘Buy’ with TP of Rs 170.
ARPOB grew 11% y-o-y, however occupancy declined to 74% owing to lower vector borne diseases and temporary suspension of cashless services. Overall MHC network EBITDA declined 14% to Rs 690 million due to a) Rs 250 million impact from pricing controls on knee caps and stents, b) Rs 200 million impact from business lost during negotiations with insurance (GIPSA), 3) gaps in clinician hiring in CNS, and d) 37% increase in minimum wages in Delhi. EBITDA at Saket (46% of beds)/ East Delhi complex (29% of beds) was down 8%/18% y-o-y.
Diagnostic business which was launched last year has 450 B2B tie-ups currently and has commenced B2C operations in Punjab in Q4FY17. This vertical currently clocks revenue of Rs 12.5 million per month, expected to triple by the end of this year. Company plans to expand this business to new locations where they do not have hospital presence. Max Bupa continues to narrow losses and is on track to break even by FY19. Company plans to carve out these businesses once they attain critical mass.
We forecast FY17-19 revenue CAGR of 16 % with EBITDA margin improving 125bps, driving 22% EBITDA CAGR and RoCE is estimated to expand to 7.9%. We maintain ‘Buy/SO’. We have assumed 20x FY19E EV/ EBITDA for MHC and 1x FY19E P/BV for Max Bupa & Antara to arrive at our SOTP-based TP of Rs 170.